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Rio Tinto Group (LON:RIO) has announced that on 21st of September, it will be paying a dividend of$1.38, which a reduction from last year's comparable dividend. However, the dividend yield of 7.3% still remains in a typical range for the industry.
View our latest analysis for Rio Tinto Group
Rio Tinto Group's Earnings Easily Cover The Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Rio Tinto Group's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 129% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.
Looking forward, earnings per share is forecast to rise by 7.0% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 65%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the dividend has gone from $1.58 total annually to $4.81. This means that it has been growing its distributions at 12% per annum over that time. Rio Tinto Group has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
Dividend Growth May Be Hard To Achieve
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Although it's important to note that Rio Tinto Group's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time.
The Dividend Could Prove To Be Unreliable
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The track record isn't great, and the payments are a bit high to be considered sustainable. We don't think Rio Tinto Group is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Rio Tinto Group that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.